FDP Company produces a variety of home security products Gary Price, the company's president, is concerned with the fourth quarter market demand for the company's products Unless something is done in the last two months of the year, the company is likely to miss its earnings expectations of Wall Street analysts Price still remembers when FDP's earnings were below analysts' expectations by two cents a share three years ago, and the company's share price fell 19 the day earnings were announced In a recent meeting, Price told his top management that something must be done quickly One proposal by the marketing vice president was to give a deep discount to the company's major customers to increase sales, which may not help the bottom line on the contrary, it could lower income The controller said, Since we have enough storage capacity, we might simply increase our production in the fourth quarter to increase our reported profit Discussion points Gary Price is not sure how the increase in production without a corresponding increase in sales could help boost the company's income Explain to Price how income carries with respect to production level Is there an ethical concern in this situation If so, which parties are affected Explain My Answer An increase in sales resulting from offering a deep discount would not help the bottom line because discounts would lower the selling price whereas the costs remain the same consequently margins get squeezed and for that reason, the bottom line might shrink regardless of the increase in sales However, cost of goods sold opening stock purchases closing stock, then an increase in closing stock might mean a decrease in cost of goods sold, which in turn would increase margins and earnings This approach might seem to be an unethical choice, because it is like dressing the financial statements such that unearned income hits the bottom line, having said that, it is perfectly within the rights of the business entity Teacher next question I need help with this next question please I am so lost now ( If FDP Company decides to increase production in the 4th quarter, what impact would this have on future periods Does this consideration change your earlier conclusion Why or why not

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FDP Company produces a variety of home security products. Gary Price, the company's president, is concerned with the fourth-quarter market demand for the company's products.

FDP Company produces a variety of home security products. Gary Price, the company's president, is concerned with the fourth-quarter market demand for the company's products. Unless something is done in the last two months of the year, the company is likely to miss its earnings expectations of Wall Street analysts. Price still remembers when FDP's earnings were below analysts' expectations by two cents a share three years ago, and the company's share price fell 19% the day earnings were announced. In a recent meeting, Price told his top management that something must be done quickly. One proposal by the marketing vice president was to give a deep discount to the company's major customers to increase sales, which may not help the bottom line; on the contrary, it could lower income. The controller said, "Since we have enough storage capacity, we might simply increase our production in the fourth quarter to increase our reported profit."

Discussion points:

Gary Price is not sure how the increase in production without a corresponding increase in sales could help boost the company's income. Explain to Price how income carries with respect to production level.
Is there an ethical concern in this situation? If so, which parties are affected? Explain.

My Answer:

An increase in sales resulting from offering a deep discount would not help the bottom line because discounts would lower the selling price whereas the costs remain the same consequently margins get squeezed and for that reason, the bottom line might shrink regardless of the increase in sales. However, cost of goods sold = opening stock + purchases - closing stock, then an increase in closing stock might mean a decrease in cost of goods sold, which in turn would increase margins and earnings.

This approach might seem to be an unethical choice, because it is like dressing the financial statements such that unearned income hits the bottom line, having said that, it is perfectly within the rights of the business entity.

Teacher next question: I need help with this next question please. I am so lost now :(

If FDP Company decides to increase production in the 4th quarter, what impact would this have on future periods? Does this consideration change your earlier conclusion? Why or why not?